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Old 08-22-2017, 09:01 PM   #21
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Actually for someone with a low spending requirement, I think it is better to have more in tax advantaged accounts even if they are not Roth. The money is only taxed as you take it out. If you take it out at near poverty levels, you are really not going to pay much if any tax.

Example you have 1.2 million in a 401K and 500k in after tax account. A married couple pulling a taxable $20,000 out of the 401K and taking $15,000 in dividends and capital gains from the after tax account is going to pay $0 in federal tax.

I ran this as a $20,000 taxable 401K or IRA distribution, $7,000 in qualified dividends from the taxable account and $8,000 in long term capital gains from the taxable account. I used 2016 tax software.

$35,000 to live on, $0 tax due.

Probably can bump up a bit more on the figures and still be $0 tax.
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Old 08-22-2017, 09:05 PM   #22
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OTOH, for the same amount of portfolio, you would wish the majority of your money were NOT in tax-advantaged accounts.
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Old 08-22-2017, 09:37 PM   #23
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OTOH, for the same amount of portfolio, you would wish the majority of your money were NOT in tax-advantaged accounts.
Tax advantaged accounts include one often overlooked benefit which is near immunity from bankruptcy judgements.
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Old 08-22-2017, 09:49 PM   #24
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I find it difficult to believe a 75/25 portfolio begun in 2000 and adjusted for inflation is doing “Well”. I am assuming he meant 3-5 year treasuries when he said 75/25 stock intermediate term treasuries. Of course he also does not define what he means by stocks — other than to call them common stocks, but the S&P500/ ST bonds which was being floated in the years after this study as sure to last 30 years with a 4% withdrawal was down to 491 thousand at the end of 2015. A inflation adjusted 60%+ portfolio decline. I cannot imagine a 4.5% withdrawal having a chance of success there.
Raddr's Early Retirement and Financial Strategy Board • View topic - Hypothetical Y2K retiree update
Let's assume he meant the Total Stock Market index.

The portfolio you linked to uses the S&P500 and a 6 month commercial paper for the equity/bond portion. Choose a different asset and you'll get a different result. Besides, the S&P500 returned almost 12% in 2016 and commercial paper rates rose during the year, so that portfolio is on its way up.

Interestingly, lower down on the same page that you referenced, a guy shows the performance of a VBINX based portfolio w/constant 3% inflation & it is doing pretty well considering what we've been through over the last 16 years.
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Old 08-22-2017, 09:54 PM   #25
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I also found it interesting that he bases this on tax-advantaged portfolio:



I don't know about the rest of you, but I don't have anything close to a majority of my retirement funds in a tax-advantaged account. Wish I did, but even with maxing out 401ks, etc. it wasn't close and I couldn't FIRE just with those amounts. So assuming everything is coming from tax-advantaged seems like a weird assumption. Seems like there would be a bigger tax hit if that was your source of income during retirement. Think the number would be different if it all came from a regular investment account? It seems so to me since you've already paid some taxes on the funds already during your w*rking life.
I am in the same boat as you and have more in taxable accounts than in retirement accounts. Taxes are paid from my annual withdrawals, so there is no "tax impact" on the portfolio.

In Bengen's paper, the retiree would have to pay income tax rates on the all withdrawals, so we should come out ahead since a portion of our withdrawals are from our capital (no tax), some portion is taxed at cap-gain rates and some at income tax rates.
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Old 08-22-2017, 10:05 PM   #26
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4.5%? Oh no!! Better ramp up my lifestyle.
My thoughts too. I'd be living high on the hog if I were withdrawing 4.5%!
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Old 08-22-2017, 10:22 PM   #27
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Isn't this old news? Its always been 4.5. %, i remember reading that in his study when i first learned about it. Obviously the finance sales are going to round down to juice their AUM.
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Old 08-22-2017, 10:43 PM   #28
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I also found it interesting that he bases this on tax-advantaged portfolio:

I don't know about the rest of you, but I don't have anything close to a majority of my retirement funds in a tax-advantaged account. Wish I did, but even with maxing out 401ks, etc. it wasn't close and I couldn't FIRE just with those amounts. So assuming everything is coming from tax-advantaged seems like a weird assumption. Seems like there would be a bigger tax hit if that was your source of income during retirement. Think the number would be different if it all came from a regular investment account? It seems so to me since you've already paid some taxes on the funds already during your w*rking life.
+1
Not enough of a quant to calculate it, but has to be more than the published number.

Logic says it would be different if the money was coming from post-tax accounts due to preferential dividend and capital gains treatment plus the untaxed draw from principal. My guess is there are not enough of us in that boat to justify the research and analysis
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Old 08-23-2017, 01:52 AM   #29
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I find it difficult to believe a 75/25 portfolio begun in 2000 and adjusted for inflation is doing “Well”. I am assuming he meant 3-5 year treasuries when he said 75/25 stock intermediate term treasuries. Of course he also does not define what he means by stocks — other than to call them common stocks, but the S&P500/ ST bonds which was being floated in the years after this study as sure to last 30 years with a 4% withdrawal was down to 491 thousand at the end of 2015. A inflation adjusted 60%+ portfolio decline. I cannot imagine a 4.5% withdrawal having a chance of success there.
Raddr's Early Retirement and Financial Strategy Board • View topic - Hypothetical Y2K retiree update
I guess if you pick your own allocation you can make it look bad. Well here's my 60/40 total stock market and total bond market, which over on bolgehead's forums if pretty common. It does just fine thank you. Why would you pick ST treasuries?
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Old 08-23-2017, 01:56 AM   #30
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I don't worry about the year 2000 scenario as I am living it, having retired during 1999. In spite of two nasty bear markets, at this point our net worth is ahead of inflation by a nice margin (knock on wood). But admittedly we haven't been drawing and spending anywhere close to 4.5% percent inflation adjusted.
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Old 08-23-2017, 01:59 AM   #31
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In fact anything between 60/40 and 40/60 at a 5% would do just fine. No option for inflation adjustment is given.

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Old 08-23-2017, 03:29 AM   #32
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the term safe withdrawal rate means it was stress tested by being inflation adjusted yearly as inflation actually unfolded .

don't forget over 30 years the 1965/1966 group did not do badly if you look at the averages for markets . rates and inflation .

but it was the sequence of that inflation that did them in the first 15 years . it wasn't so much market and bond returns that killed them . it was the sequence of inflation that made them the worst group .
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Old 08-23-2017, 03:32 AM   #33
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Let's assume he meant the Total Stock Market index.

The portfolio you linked to uses the S&P500 and a 6 month commercial paper for the equity/bond portion. Choose a different asset and you'll get a different result. Besides, the S&P500 returned almost 12% in 2016 and commercial paper rates rose during the year, so that portfolio is on its way up.

Interestingly, lower down on the same page that you referenced, a guy shows the performance of a VBINX based portfolio w/constant 3% inflation & it is doing pretty well considering what we've been through over the last 16 years.
again , constant inflation will give you totally different skewed results . it is like trying to use average returns when spending down .

milevsky demonstrated how there can be as much as a 15 year difference in how long the money lasts using averages vs actual sequences
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Old 08-23-2017, 03:49 AM   #34
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at 4% , 90% of all the rolling 30 year periods since 1926 left you with more than you started with . 67% left you with 2x what you started with and 50% left you with 3x what you started with .
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Old 08-23-2017, 05:16 AM   #35
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at 4% , 90% of all the rolling 30 year periods since 1926 left you with more than you started with . 67% left you with 2x what you started with and 50% left you with 3x what you started with .
Great news, but at what point does that curve flatten or turn around? 4.5%? 5%? 8? Where does one end up with 25% of starting portfolio?

I'm guessing it's a close shave (do people still use that term?) where 4% produces the above and 5% means failure. No?
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Old 08-23-2017, 05:26 AM   #36
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the trinity study dealt with the success rates . ideally you want 90% or above.

here is a chart

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Old 08-23-2017, 08:42 AM   #37
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Actually for someone with a low spending requirement, I think it is better to have more in tax advantaged accounts even if they are not Roth. The money is only taxed as you take it out. If you take it out at near poverty levels, you are really not going to pay much if any tax.

Example you have 1.2 million in a 401K and 500k in after tax account. A married couple pulling a taxable $20,000 out of the 401K and taking $15,000 in dividends and capital gains from the after tax account is going to pay $0 in federal tax.

I ran this as a $20,000 taxable 401K or IRA distribution, $7,000 in qualified dividends from the taxable account and $8,000 in long term capital gains from the taxable account. I used 2016 tax software.

$35,000 to live on, $0 tax due.

Probably can bump up a bit more on the figures and still be $0 tax.
Yes! I agree! To get to where you would be paying more tax than working you must be declaring over 93K in income. With 15% tax for a married couple to $73,000 no Social Security tax and 20K as standard deduction and personal exemptions. For an RMD to reach that level at age 75 the portfolio would need to be at 2.1 million and more likely than not to earn more money than is being withdrawn. It is an effective tax rate of 11.8% on 93K of income which is only 4 percent more than what Social Security tax would have been alone when working. And this is not even taking into consideration ROTH withdrawals.

Now I suppose if one is also getting SS then that creates tax on SS of 25% up to 85% of the value of the SS payouts, which for a successful couple could run up to 60K of SS benefit but 24K of Fed Tax on $153,000 of income and an untaxed portfolio of 2.1 million hardly seems onerous 15.6% Federal tax on total income-- less than twice the rate a single worker pays making the minimum wage in SS and Fed taxes.
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Old 08-23-2017, 08:49 AM   #38
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That is why I favor some prudent ratcheting up of withdrawals/spending as one avoids the burly bear.

If someone retired 5 years ago with $1 million and a 4% WR and they now have $1.5 million then I see no reason why they cannot prudently ratchet up to 4% of $1.5 million.... it is just as prudent as someone with $1.5 million who is just now retiring starting with a 4% WR.
I agree that good early results show that you didn't get one of those bad scenarios where you get hit by an early bear. Some increase seems reasonable.

But, I'm not sure about using the whole amount. That initial $40,000 from a $1 million portfolio assumed I was okay with knowing that 5% of historic starting years didn't survive 30 years. I went out on a limb a little.

Now that I'm taking $40,000 from a $1.5 million portfolio, that's a 2.7% withdrawal rate. 100% of historic starting years survive at that rate.

Upping my withdrawals to $60,000 means going back to the 5% probability of failure. Maybe it makes more sense to go to a number that's above $40,000, but below $60,000, that has a historic survival rate of 100%. i.e. use some of the good results to raise the withdrawals, and the rest to improve the chance of success.
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Old 08-23-2017, 08:56 AM   #39
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If you are in the 25% or above tax brackets, you will be better off to put (max) money in tax-advantaged accounts. I am not sure how much benefits in the 15% tax bracket. For me, if I will be in the 15% tax bracket, I will reduce my contributions to the tax-advantaged accounts.
Everything depends on the in-rate and out-rate (tax), so it is difficult to optimize everything when the future is known, and there are many factors to consider (Roth conversion, social security, and Obama care, etc.) I just want to get my main directions right and don't care about the details.
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Old 08-23-2017, 09:43 AM   #40
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Thanks to the OP for the Bengen link. Am on vacation right now or I would check the 4.5% SWR using VPW. Perhaps someone could do that VPW check?

For us the retirement account scenario is pretty realistic. A high percentage of our money fits this. But luckily we don't need to go up to even 4% to have a good life.
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